Crowdfunding for a good cause is very common these days. You’ve probably heard about people contributing money for a good cause, such as medical care for someone who can’t afford it or the construction of a charity hospital. There are numerous reasons why people may wish to volunteer, give, or financially support a cause. The majority of us learn about these causes through social media. These platforms bring people from all around the world together and enable crowdsourcing. While you may have heard of similar social causes, real estate crowdfunding is also possible.
What is crowdfunding?
The real estate industry is no different when it comes to crowdfunding. It enables real estate investors to swiftly and conveniently raise significant sums of money. As a result, they become shareholders in the business or property. They can become shareholders in a project and raise funds that they would not have been able to raise otherwise through crowdfunding. However, as compared to crowdfunding for social purposes, Indian real estate crowdfunding is less developed and popular.
Let’s understand the crowdfunding process with the help of an example. A real estate developer comes across a run-down property with no facilities. This house is priced at Rs 2.5 crore, possibly due to its prime location. The developer develops a list of his requirements and estimates for renovations, amenities development, and so forth. Let’s say he thinks that after the necessary renovations and development for Rs 1.5 crore, the property’s market value will be Rs 8 crore in four to five years. As a result, this individual now demands Rs 4 crore. This is where crowdsourcing as a means of attracting individual investors comes into play. Rather than taking out a bank loan, the developer decides to work with these investors.
Is real estate crowdfunding a good investment?
When a sponsor sees a real estate opportunity, he usually doesn’t have the funds to carry it out on his own. As a result, they allow individuals to contribute to the project’s capital. Crowdfunding allows you to invest in high-tech ventures with a little initial expenditure. Unlike REITs, crowdfunded opportunities are more transparent since they allow investors to invest in individual initiatives without having to worry about asset maintenance and management.
Because crowdfunded real estate projects are highly illiquid, they must be evaluated like any other investment option. You can’t sell your investment whenever you want, unlike when you own a house by yourself. You are committed for the duration of the project’s holding period.
Many people who would not otherwise be able to participate in real estate can now do so thanks to real estate crowdfunding. This is an excellent concept for low-cost investors who want to gain access to high-yielding real estate. However, before investing in a crowdfunding venture, you should evaluate it.
How does crowdfunding work in India?
The concept behind crowdfunding is that when a developer or real estate professional sees an opportunity, they may not always be able to follow it on their own. As a result, they allow individuals to donate a portion of the funds needed to complete the project.
First, the sponsor identifies a business opportunity, prepares the property acquisition, and even assumes responsibility for the asset’s maintenance and eventual sale. The crowdfunding platform is where the sponsor finds investors interested in real estate as a source of passive income. To acquire the asset in which the investors are shareholders, a Special Purpose Vehicle (SPV) is formed.
While investing in crowdfunding options, it is important that you invest with trustworthy crowdfunding platforms to reduce risk and earn higher returns. Assetmonk is India’s fastest growing tech-enabled real estate investment platform specializing in real estate crowdfunding and fractional ownership. Assetmonk is a real estate firm based in Hyderabad that focuses on properties in Hyderabad, Bengaluru, and Chennai. The company’s mission is to provide tailored real estate solutions to retail investors who want access to institutional-grade properties. Assetmonk has utilized its Customer-Driven Services to rise as the market leader as foreign investors flock to India’s Real Estate! You can start investing in Assetmonk with a minimum investment of Rs. 10 Lakhs with an expected annual return of 14-21% p.a. The company offers institutional-grade commercial properties with short-term and long-term investment options. By investing with Assetmonk, you can earn a rental yield of 8-12% p.a.
Here’s how it might operate in practice: Let’s imagine a real estate developer comes across an old commercial property with few contemporary amenities for a price of Rs 3 crore. After conducting research, he concludes that by investing Rs 2 crore in improvements and leasing out the entire building, he can quadruple the property’s rental revenue and increase its market worth to Rs 8 crore in 4-5 years. So, rather than taking out a bank loan for the entire Rs 5 crore, he invites individual people to become investors in the enterprise.
An investor can participate in a crowdfunding offer in two ways. When you invest in an equity-based model, you can earn returns based on property rental revenue or a share of the appraised value if the property is sold. When opposed to debt investing, equity gives superior returns. Debt-based finance has grown in popularity since investors receive a fixed interest rate based on the amount invested.
Types of crowdfunding
The different crowdfunding options include:
- Debt Crowdfunding
The property developer promises to pay back investors their money plus a predetermined interest rate if they participate in debt crowdfunding. The investors in this sort of crowdsourcing do not receive any shares in the sale. Debt crowdfunding resembles peer-to-peer lending. Debt crowdfunding may be a good option for real estate developers who want to avoid diluting their project’s equity, especially if there are already other investors or partners engaged. Some investors prefer debt investing to stock investing because they want to know how much money they’ll make.
Many investors, on the other hand, are willing to take on the additional risk of an alternative investment like real estate crowdfunding in exchange for the possible upside of an equity investment. For developers that don’t already have a considerable number of assets and a proven track record, raising financing through debt investment can be more difficult.
- Equity crowdfunding
Investors purchase a piece of the project’s equity through equity crowdfunding. Rather than agreeing to pay the investors a fixed amount, the developer is letting them participate in the deal’s profits, whether through rental income, appreciation, and equity build, or all three. For investors, equity crowdfunding is usually the riskier choice, but it also has the largest upside potential. The investors may lose everything if the developer fails to complete the project. On the other hand, if the real estate investment goes according to plan, the investors can earn handsomely.
Equity crowdfunding may be less risky for the developer if the project is delayed or does not generate the expected cash flow because it does not imply a guaranteed payment from the developer to the individual investor. However, they may be sharing a lot more of the earnings with the investors than they would if they were borrowing money.
Benefits and risks of crowdfunding in real estate
For both novice and experienced investors, securing the necessary funds for real estate investments can be a difficult task. Crowdfunding for real estate might be a great way to raise money. It also has several other noteworthy advantages for both borrowers and investors/lenders, including the following.
- It allows investment with small amounts
- Provides a stream of passive income
- Lower risk if investments are made through trusted partners
- Helps in portfolio diversification
- Low pressure in terms of property management for the investors as the crowdfunding platforms take care of the property management.
- Better liquidity rates
Anyone interested in participating in crowdfunding should be informed of the risk associated. Some of risks of investing in real estate crowdfunding includes:
- Risk of default, i.e. default is caused by the developer to whom the fund is provided.
- Risk of fraud
- Risk of non-completion of the project
- Crowdfunding income is also taxable
Real Estate Crowdfunding is the way of the future in the real estate industry, with investors eager to participate in real estate investments on a small scale. Those who are unable to contribute a large sum of money all at once can diversify their little investments among various crowdfunding real estate projects. Investors are recommended to determine their investing goals, as this will assist them in determining the best form of investment for them. If investors follow a consistent strategy in their investing ways through a trusted crowdfunding site and put small sums to reduce risk, real estate crowdfunding is an appropriate investment type for low and medium-income investors.